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Friday, April 24, 2009

The Entrepreneur's Survival Kit For The Current Economy

As an entrepreneur and an adviser to many start up companies and entrepreneurs I have first hand knowledge and experience fund raising, interacting with investors and building new teams in this economy. I have seen many business plans, have spoken to scores of investors, worked closely with new companies and have shepherded aspiring business owners through the early phases of business development. I have learned a few lessons about how entrepreneurs can best position themselves to optimize their time and effort in the current climate and hopefully experience a positive outcome for themselves and their business.

Expectations - There is no secret to the fact that investment in new companies is down. One source estimates that VC's are investing 50% less then they did last year at this time. The climate has also impacted individual and angel investors. Their own portfolios have been diminished and they are not immune to the new "economic conservatism" sweeping the globe.

The first thing entrepreneurs need to do is to adjust their thinking to coincide with the impact of the new economic reality on their proposed business. This may sound obvious yet many aspiring business owners still think that they can float an idea, get funded and become successful using an outdated formula. Sorry, but this is not likely given our current economic environment. This is not to say that you should pack up your tent and give up. On the contrary this may be one of the best times to start a business if you can weather the storm and introduce a new product or service that fits into the dynamics of the new economy.

The key is to set an expectation that raising funds is going to be harder and take longer then it has in the past. Get yourself ready for some creative thinking on how to bootstrap your company and sustain it on a lean budget until you have concrete evidence of customer adoption and sustainable revenue per customer.

What Is Being Funded? - Before you go to far down the road of building a company you should determine what investors are investing in. Before you commit money and time in a venture check to see if your idea fits into a category that investors recognize as an area that has potential for significant upside. I call this "Riding A Wave" and have referred to it in previous blogs. Your idea or business may seem to you as revolutionary with great potential. However, if investors are not interested in your space it may never get funded. You need to position your company in a way that is aligned with current funding trends.

To find out what investors are interested in go to VC web sites and look at the recent investments they have made. This will be found in the portfolio section of the web site. Investors are very concerned about investing in areas that other investors are interested in. The net effect is that the herding investment strategy creates a higher level of investment in a sector which in turn helps to fuel the market for that sector.

There is a delicate balance between investor interest and investment saturation. You want to see investors investing in your sector but not too much investment. If a majority of the investors already have representation in a sector it may be too late for you to participate. This is what I call "The Cresting Wave". Unless you have a unique spin to your business that represents an element that can enhance the initial wave investors will pass on your investment if they already have representation in their portfolio.

If you find that some investors have made investments in your area and others do not have portfolio representation you are in a good place. Just like a surfer get your board waxed and get out there. Timing is everything and in this economy even more so!! You want to catch the investment wave at the precise point that gives you maximum investment opportunity. You can not be too late or too early.

Friends And Family - Traditionally friends and family members have been looked upon as an early source of seed funding for a business. This may not be the case anymore. Your friends and family are also feeling the effects of the economy and may not have the money or the inclination to part with the funds they have. However, they are still a great support group and may be able to contribute in other ways.

Family members may have more time on their hands because they are out of work or working shorter hours. Many of your friends and family will have skill sets that you can use in getting your business off the ground. Instead of asking them for money ask them if they can help with bookkeeping, sales, programming, document preparation, investor led generation and general business advice. They may also have some extra space, computer equipment, phone, fax machines, etc that you can use to setup and run your business.

Your friends and family do want to help you. Asking them to invest their time in something that may help their own careers and broaden their skill sets will be welcome. It also fosters a better relationship. Your are communicating that you value their expertise and skills not just their cash. The long term implications of this will be invaluable.

Stage Your Business And Product Development - Seed round of funding is really hard to find these days. Generally speaking investors are not investing in ideas or very early rounds. This leaves entrepreneurs in a bit of a dilemma. So how do I get my business started with no external initial working capital?

The best way to deal with this situation is to break you product or business down into segments that get you to a point were you can fund a prototype or alpha version of you product without external funding and grow the business recognizing the uncertainty in the investment market.

The Initial Product or Service -It is highly likely that you will personally have to fund the first iteration of your product or service. The goal for this phase is to create something that demonstrates what it is and what it can do. It does not have to be fancy or pretty but it does need to work.

Taking On Customers - In the web world this is a bit easier then in some domains. Investors today want to see how consumers react to the product or service. Drive some traffic to your web property and get a hint of the economics of your business and customers reaction to your product. If you do not have a web based product try to get people or companies to try out the product on a trial basis. If it is a capital intensive product identify a potential business partner that will work with you to create a prototype and have them introduce it to their customer base.

Investment Round - In the first two phases you should have been contacting potential investors making them aware of what you were doing and providing them with progress updates. Be prepared to send them an executive pitch. Your experience in the first two phases will provide you with good hard evidence and facts about the dynamics and potential for your business.

Preparing The Investor Pitch - I am a great believer that your first impression matters a great deal in increasing your likelihood of getting funded. It is also the one area that entrepreneurs continue to struggle with. In this day and age if you are lucky to get an investor to look at your business you will only get a minute or two of their time to skim the presentation.

Many of the plans I see are either too long, too complicated or incomplete. To combat this I have gone to the extreme of providing my portfolio company's with an executive pitch template and two year operating plan spreadsheet to help them understand how to think about their business and structure their thoughts. The executive pitch should contain the following:

What Is It?

What is Different About It?

Who Are the Competitors?

What Other Companies In this Sector Have Been Funded And For How Much?

How Are You Going To Make Money?

How Much Money Do You Need?

Who Are the Team Members?

When Will You Have Your First Deliverable?

When Will You Be Profitable?

Where Are You?

There are certainly clever ways to present this information that will increase its impact. However, the essential information must be there, be accurate and well formed. The presentation should be brief and to the point. If it is a slide show it should be between 10 and 15 slides. If it is an executive summary keep it around 5 pages.

Pitch Review - Never send a pitch or document to an investor without someone you respect having reviewed the presentation. It would be best to identify a reviewer that has no idea about what you are doing and get their reaction. Adjust and change the pitch based on the feedback. If possible run through the presentation verbally with someone to understand what sections should be presented in what order and to determine the proper cadence for the presentation. Also, have some experts in your field take a look and see how you compare to the competition.

Submitting The Investor Pitch - You should still create and submit an investor pitch to funding sources even if you are in the first two stages of your business development. Investors are great sources of information and feedback. Investors need entrepreneurs and have a keen sense of what is happening in the marketplace, understand technology and will tell you what you need to do to get funded. If you are not an experienced entrepreneur with investor contacts have some one that has good contacts submit your plan for you. Investors are particular about what plans they look at. Having a known entity submit your plan will increase the chance of getting a response to your plan.

What Are Investors Funding? - Many entrepreneurs have great ideas and products. However, this does not automatically mean that investors will invest. Submitting a plan to various VC's and individual investors will help you to understand what they care about.

How Do Investors Perceive Your Business? - Investors may have a very different perception of your business then you do. It is important to get your company aligned with their thinking or find a way to convince an investor that they might consider thinking about your business in a different way.

Relationship Building - An entrepreneur should spend time cultivating relationships with investors. Submitting your pitch and engaging an investor in a dialogue is a good way to start the relationship. Their feedback may be a short e-mail response or a sit down meeting and a run through your presentation. Either way getting to know each other is important. You may be on the funding road for the duration of your business life and have to submit multiple plans. Sincere and professional relationships with investors are important. It may make the difference between a go and no go in getting your business funded.

Iteration - Do not back yourself or your business into a corner where you can not iterate on the product or business model. The business environment is changing rapidly especially in the areas of customer monetization and technology adoption. Your business organization and or your technology platform should plan for this and be flexible. The business, product and customers you originally envisage may be very different at various stages of your company. You may have to reinvent your business several time to get funded and to adjust to ever changing consumer preferences.

Globalization - There is no such thing as a local economy anymore. Doing business has changed radically. A company or product that does not have a global offering is going to struggle and miss opportunities that could have made it successful. Study markets outside your comfort zone and understand how you can create a product or service that is attractive to them.

Research - Start up businesses require tremendous energy, time and focus from all of its members to make a business work. Despite the need to get the product and service up and running as soon as possible you always need to be looking around to see who the competitors are or might be, what technology may impact your business, what new investments are being made by investors and changes in consumers preferences. This is especially the case now when everyone is adjusting to the new economic reality. Changes are occurring at a rapid pace and require a company to react quickly these changes.

Do Not Give Up - We are all being tested in our personal and professional lives. Entrepreneurs are especially challenged. However, this is not a reason to give up and not pursue your dreams. In fact, if you can figure out how you can create a business that specifically address the new world order it may be the best time ever to establish a business. The overall business environment will get better. If you can get something going now you may be surprised at how successful you will be a year from now.

In conclusion, the current economic climate requires special tactics and techniques to increase an entrepreneur's chances of success. In many ways lessons learned from launching a business in these times will pay off as the economy improves.

For more advice on how best to succeed in the current economic environment readers may want to review the following previous blog entries: